Product and Marketing Consulting and Services

Reference Pricing

Completely unrelated to my usual posting, I had an interesting discussion on Facebook today about the changes that consumers are experiencing. This discussion was about how some items prices remain the same, but the quantity you receive is less.

Case in point: Toilet paper.

On the right we see how the roll used to be. Smaller cardboard core, and more paper wrapped around it. On the right, larger core (or more air) and less paper rolled around it. For the same price. Why do manufacturers do this?

An insight into why this works is the concept of “Reference Price“. This is where the consumer has some institutional memory of what they have paid for a good in the past, and when shopping for similar goods, keeps that “reference” in mind.

When the cost of materials increases, which is not uncommon, raw commodities do fluctuate in price, mostly increasing, manufacturers have only a couple of choices. They can make the same goods and pass on the increase to the customers. Or, they can keep the price relatively constant, and alter the packaging to make the product “seem” equivalent, but in reality be much less than was offered before.

Can you think of another consumer example?

One that comes readily to mind is the 2 quart Ice-cream tub. In the US, they are (or were) round 2 quart containers that were the de facto standard for families to buy. Round, easy to store, and all the same.

Starting in the early 2000’s, what used to be a half gallon, or 2 quarts began to shrink. First to 1.75 quarts, and now to 1.5 quarts, the standard “half gallon” is now 48 ounces, down from 64 ounces.

Why?

Well, part of it was the cost of making the product. But almost as important is to maintain a similar reference price in the face of systemic inflation. That stability of price was deemed more important that the quantity packaged. Of course the change wasn’t immediate, and it wasn’t across all producers. While I don’t know who blinked first, once the change began ratcheting down the size of the standard half gallon, all the major producers got on board.

So that today, when you go stare at the ice cream section at the supermarket, all you see is 1.5 quart containers from the major brands.

Summary

Pricing is as much psychology as it is science. The concept of reference price is powerful in the consumer world, and spills over into the realm of B2B marketing and pricing strategies.